High-Tech Fall
Israeli firms mirror the NASDAQ.
AVI MACHLIS
Jewish Telegraphic Agency
Jerusalem
hen Amir Aharoni quit his job as a
senior executive at the Israeli high-
tech firm Optibase to establish a start-
Illir up called Mobixell Networks, being a
technology entrepreneur was a far more promising
endeavor than it is today.
True, share prices on the NASDAQ stock
exchange, where Optibase trades, already were falling
last December, and dot-corn companies were col-
lapsing by the dozens.
Yet Israeli entrepreneurs felt somewhat insulated
from the technology
b, turmoil.
They had been spared the worst of the dot-corn car-
nage, since Israeli industry focused on creating infra-
structure technologies for Internet and telecom firms
instead of on consumer Web sites, which lacked solid
business models and were the first to collapse.
Furthermore, even though investment in Israeli
start-ups slowed toward the end of 2000, it had
been a record year for the sector, which in recent
years has fueled Israeli economic growth.
But things have changed for the worse this year:
• Blue-chip technology companies like Intel and
Cisco are reporting profit warnings and laying off
employees by the thousands.
• Information technology spending in the United
States — where many Israeli firms sell their products
— is growing at a much slower pace than expected.
• By mid-March, the NASDAQ index had plunged
by 63 percent from its high of 5,049 one year ago.
No longer insulated, Israel's high-tech sector is
feeling the shock waves of these developments.
"We have to be concerned," said Aharoni, whose start-
up is developing a technology to manage traffic of multi-
media and video applications over wireless networks.
"Even though I think that the uniqueness of our
team and the background of our people puts us in a
better position, we still have to be careful.
"We know that no fund-raising is certain anymore."
The high-tech industry's fall already has affected
Mobixell's day-to-day operations, Aharoni said. The
company is being very cautious about spending. At
the same time, it is no longer shooting for a quick
"exit," as venture capitalists call an initial public
offering on the stock market or the lucrative sale of a
start-up to a bigger group.
Battered Economy?
As increasing numbers of Israeli tech companies fall
victim to the turbulence, officials are concerned
about the potential for a broader bartering of the
Israeli economy.
PricewaterhouseCoopers, the international account-
ing firm and consultancy group, reported that Israeli
start-ups attracted $3.2 billion of investment from
venture capital funds during 2000. According to a
recent Israel Finance Ministry report, that accounts
for 2.9 percent of Israel's gross domestic product.
In the United States, by contrast, start-up invest-
ments accounted for only 0.7 percent of the econo-
my last year.
The slowdown has contributed to the Finance
Ministry's sharp reduction of economic growth fore-
casts for 2001 from about 4.5 percent to about 2.5
percent — and the worst may be yet to come.
The Finance Ministry report warns that if the
start-up sector slows by 25 percent or more com-
pared with last year — a possibility given the current
climate — Israeli economic
growth may fall below 2 per-
cent. That would be the slowest
growth rate in more than a
decade.
The status of Israeli high-tech
in the world's eyes was impor-
tant enough for Prime Minister
Ariel Sharon to take time out
from his hectic schedule last
week for a satellite address to a
Amir Aharoni
Silicon Valley conference on
Israeli technology
After spelling out his plans
for peace and security, Sharon
promised to pursue an econom-
ic agenda of "fiscal consolida-
tion, liberalization of financial
markets and necessary econom-
ic reforms." He also promised
to move swiftly on tax reform, a
particularly popular pledge
Tobias Fischbein
since many foreign companies
operating in Israel are unhappy
with the tax rate.
- But nothing the Israeli government may do can
stop the tidal wave from Wall Street that is starting
to crash down on Tel Aviv.
The trends confirm what analysts have said for
months: that Israeli-Palestinian violence has far less
effect on Israel's high-tech industry than does the
NASDAQ.
The most immediate impact is on the ability of
Israeli start-ups to raise new cash.
IVC Online, an Israeli venture capital industry
research group, recently issued
i
a study showing that
the amount of money raised by Israeli start-ups in
recent years has tended to rise and fall in line with
the ups and downs of the NASDAQ.
"The trend is definitely similar," says Eran
Mordecai, director of IVC Online. "As long as the
NASDAQ will not recover, the Israeli high-tech
community and high-tech start-ups will have diffi-
culty raising new money." Mordecai also expects that
some 88 Israeli venture capital funds — which have
about $3 billion free to invest — will spend more of
their money beefing up companies in their portfolios
rather than investing in embryonic start-ups.
This also means that existing start-ups without
solid business plans could collapse.
Silver Lining
Koldoon, an Israeli database company that tracks the
technology sector in Israel and Europe, reports that
during the past year 256 Israeli companies — out of
some 1,500 total — have shut down.
While many of these companies were dot-corns,
the next wave of shutdowns is expected to include
more hard-core technology companies. Layoffs
already are sweeping the sector.
R-U-Sure, a company that created a computer
application for comparing prices on the Internet,
was a particularly prominent Israeli start-up to go
belly up.
It was funded by Yossi Vardi, who rose to fame for
founding Mirabilis, the Israeli company that created
the hugely popular ICQ messaging program.
Mirabilis was sold to America Online in 1998 for
$400 million, a move that led a wave of buyouts of
Israeli companies.
Layoffs have hit companies ranging from Yazam, a
high-profile venture group that made headlines in
the international business press when it started to
flounder, to Versaware, a start-up that makes tech-
nology for producing e-books.
Commtouch, a NASDAQ-listed e-mail services
company, sacked 190 employees, or half its work-
force.
The growing casualty list even has hit top Israeli
names such as Gilat Satellite, which laid off 275
employees, or 18 percent of its staff, just two days
after issuing an earnings warning that sent its stock
crashing more than 50 percent on the NASDAQ.
According to Tobias Fischbein, Israel technology
analyst at the Tel Aviv office of Lehman Brothers
investment bank, Israeli stocks have more or less per-
formed in line with the NASDAQ.
By mid-March, the NASDAQ was down 19 per-
cent since the beginning of the year. Fischbein says
that of about 100 Israeli stocks on the NASDAQ,
59 companies that had a market capitalization of
more than $100 million were down 19 percent over
the same period.
But the combination of layoffs, shutdowns and
sliding stocks is not all bad news.
For several years Israel has suffered from a severe
skills shortage. Now, fired workers are expected to
gravitate toward companies with more viable busi-
ness plans. Wages already are falling.
Fischbein says this ultimately may contribute to
the sector's financial health. In recent years, he said,
a lot of money has been inefficiently allocated —
both to companies with no viable future and within
companies that were paying inflated salaries.
"The outcome will be better in terms of both the
labor market and the Israeli high-tech industry,"
Fischbein said. "The noise level will come down,
and money will be invested more wisely.
"Of course, it will all be at a slower pace and lower
valuations, but all this will contribute to the long-
term sustainable growth of the industry" ❑
3/23
2001
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